Saputo Inc
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Saputo Inc
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Greetings, and welcome to the Saputo Inc. Fiscal 2021 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, today's call is being recorded Thursday, February 4, 2021. Now I would like to turn the conference over to Lino Saputo, Jr. Please go right ahead.
Thank you very much, Tommy.
Good afternoon, everyone, and thank you for joining us. Taking part in our call today are Lino Saputo, Maxime Therrien and Kai Bockmann. Before answering questions from our analysts, Lino and Kai will provide an overview of our fiscal 2021 third quarter results and an update on our operational initiatives. Before we begin, I remind you, this call is being recorded and will be posted on our website. Please also note that some of the statements provided during this call are forward-looking. Such statements are based on assumptions that are subject to risks and uncertainties. We refer to our cautionary statements regarding forward-looking information in our annual report, press releases and filings. Please treat any forward-looking information with caution as our actual results could differ materially. We do not accept any obligation to update this information except as required under securities legislation. I'll now hand the call over to Lino.
Thank you, Sandy. I hope everyone is keeping safe during these difficult times. It's been almost one year since many of the lockdowns began worldwide. Within this time frame, we've been living through a chapter of our history none of us will soon forget. Amidst the atmosphere of uncertainty, I continue to be truly impressed by the resilience of our people. We've accomplished so much despite the adversity, and our teams keep bringing their best to the table and living the Saputo values every day. Together, we remain keenly focused on what we do best: safely producing high-quality dairy products for the communities we serve in over 50 countries around the world. Our third quarter results reflect the collective passion, care and expertise of our 17,000 employees despite the fact that the pandemic continues to impact our lives and our business. We've been able to adapt, and for the first time since the pandemic started, our volumes were on par with last year. However, the ongoing changes in consumer demand and the sustained impact of government-imposed restrictions forced us to adjust our activities to varying degrees. Thanks to our strong portfolio of retail brands, and by adapting our product offering early on in the pandemic, we captured new opportunities in the retail market segment. We also benefited from increased sales volumes in the industrial market during Q3.Although it's hard to predict the market conditions over the next quarters, the recovery trend we're seeing in industrial segment volumes destined for export markets is expected to continue. Nevertheless, we continue to see lower sales volumes in the foodservice market globally. This particularly impacts our U.S. division due to its large foodservice footprint. With another quarter of experience under our belt, I remain confident in our learnings and our ability to pivot our operations swiftly as needed. COVID-19 has provided us with a license to change, a license to explore paths we may never have ventured down before. As an example, the e-commerce business platform. We're seeing changes within the organization, which allows us to be able to build upon our global footprint, take full advantage of our facilities and maximize value creation. I'm very excited about the things we've learned over the last year. And the programs we're putting in place are going to last beyond the pandemic. We're now a more flexible organization on all fronts, having already adapted our operations to local realities in a cost-efficient manner. As the pandemic continues to evolve, our key priorities remain unchanged. We're committed to safeguarding the health and safety of employees, adopting commercial initiatives, production and supply chain to consumer demand, supporting the customers with insights to adapt their offerings and address changing needs, and helping our communities through ongoing donations and financial support, which have already reached $8 million since last March. Before I invite Kai to provide further detail on specific initiatives, we put forward in each of our geographies, I'd like to share some important changes in the senior management. We're pleased to welcome Lyne Castonguay in the position of Deputy, President and Chief Operating Officer in our Dairy Division (USA). Lyne brings a wealth of experience and expertise to the table, having previously held executive positions with a major Canadian food retailer as well as senior roles at a large retailer, both in Canada and in the U.S. During the upcoming year, Carl Colizza will ensure a smooth transition of the Division's leadership to Lyne in order to focus on his strategic role as President and Chief Operating Officer, North America. We're also very happy to announce that Marcelo Cohen will be appointed President and Chief Operating Officer of our Dairy Division (Argentina) effective April 1, 2021. Marcelo joined the company in 2003 and has held the position of Senior Vice President, Operations, Dairy Division (Argentina), since 2015. These appointments in senior management will help lay the groundwork for future success. And with that, Kai, it's over to you.
Thank you, Lino. Good afternoon, everyone. Let's dive right in, beginning with our largest platform, our Saputo Dairy USA Division. The U.S. continues to be the most impacted due to the continued shift in demand, especially in the foodservice segment. These trends continue to impact the Division's efficiencies and the absorption of fixed costs. In our last call together, I highlighted the challenges in relation to staffing some of our retail facilities that we were seeing -- and that we were seeing improvements. However, due to the U.S. Thanksgiving and Christmas holidays with families getting together, much of the U.S., as all of us heard in the news, saw a significant rise in cases. We continue to face challenges in some of our facilities from a staffing perspective, which made it difficult to meet some of our retail requirements. We are now finally seeing a reduction in the number of cases and with the vaccine rollout ahead of us, feel that the worst is behind us from a staffing standpoint. Having said that, we recognize that the challenge of attracting, developing and retaining top talent is a long-term challenge in our industry. With that, we will continue to drive efficiencies and optimize our network. This has and will always be a big part of what we do. We continue to adjust limited portions of our network, shifting elements of our primarily foodservice product-specific facilities to adapt to retail requirements in order to take advantage of available labor and processing capacity.We continue to see healthy retail volumes relative to historical levels and challenges in the foodservice space. There have, however, been some bright spots in foodservice, specifically as it pertains to some of our key strategic QSR partners as well as some of our foodservice partners that have been able to adapt their restaurants to more pickup and delivery. Foodservice volumes will continue to be impacted as long as government restrictions are in place. On the QSR side, we capitalized on unprecedented growth in certain segments, such as ice cream and dessert toppings. On the mozzarella side of our business, we've been able to capture wins in a highly competitive environment. This speaks to our team's abilities to deliver best-in-class service levels, whilst maintaining the highest quality products at competitive prices. Our products continue to resonate with our consumers. As an example, in Q3, we enjoyed significant growth in key items for our Friendship cultured categories, a strong Northeast regional brand in the United States with new listings at key retailers. Another example is our Montchevre category-leading goat cheese brand, where we launched another flavor line extension with additional line extensions planned for fiscal '22. Finally, we continue to bolster our private label business with key retailers, adding additional dessert topping, plant-based milk and ultra-filtered milk volume to this mix in the third quarter. In relation to the merger of our 2 legacy divisions, Saputo Cheese USA and Saputo Dairy Foods, we are well on our way to developing a game plan that will take our largest division to the next level. Very excited about some of the strategic pillars our teams will be tackling to drive our U.S. business moving forward. These include increasing the value of our ingredients business, ramping up our core portfolio, optimizing our integrated business processes, leveraging ERP to increase efficiencies, optimizing our network and ramping up our dairy alternatives business. As we progress our integrated Saputo Dairy USA strategic plan, we are evaluating and strengthening our branded presence, optimizing our marketing spend and further developing longer-term product pipelines to better address innovation gaps in the retail marketplace. We are confident that this type of discipline and focus will continue to yield added value to the Saputo Dairy USA product portfolio while leveraging our vast operational capabilities. I will be happy to share more elements of this plan once it's finalized and communicated at the beginning of our next fiscal year. In fact, the U.S. plan will be part of our global strategic plan, which we look forward to sharing with you at the same time. It will lay out how we will drive accelerated growth across all our business to complement our growth that we will continue to drive through M&A. These plans will be executed by a solid leadership group. I'm super pumped to share that we are adding 2 strong leaders, Nancy Butkus, who will spearhead our One USA marketing activities; and Lyne Castonguay, who with Carl's assistance, will transition to head Saputo Dairy USA as President and COO. Each of these leaders have had extensive careers and demonstrated the ability to drive accelerated, profitable growth. Of course, a bonus to Saputo is that they happen to be women, and so we are able to make progress on our goal to diversify our leadership team, which we know will lead to even better results. On the dairy alternative side, we have leveraged our existing infrastructure, our filling and processing know-how and technology, together with our strong customer relationships to accelerate our growth in this category. On the plant-based beverage side, we have successfully rolled out almond and oat beverages, and volumes continue to ramp up. It is our goal to have a national footprint in the United States as well as having a platform in Canada, where we will leverage our existing customer and distributor relationships to accelerate growth in this category. On the dairy alternative cheese side, we have leveraged our U.K. innovation center to develop a product that has been introduced to some of our key partners in the United States. We are currently trialing the product and have received tremendous feedback. We strongly believe that we are in a great position to establish a first-mover advantage to roll out a product that performs well on a pizza, one that could serve as a substitute for cheese made from dairy for those consumers that prefer a nondairy alternative, a product that tastes and performs like cheese, with the ultimate goal of offering a product that delivers on nutritional qualities as well. The category today is very, very small, but the potential we feel is tremendous. Although we are playing in the plant-based beverage space, that part of the business has become saturated with a large number of players, brands and looks to become largely commoditized. Nondairy cheese, on the other hand, has relatively few players and is a space we feel we can be successful in. We are uniquely positioned in the global marketplace to continue to leverage innovation, product quality and brand strength around the globe. We continue to leverage our North American manufacturing footprint with efforts such as the production of the Canadian Dairyland aerosol product now produced in our U.S. network, thereby eliminating previous reliance on third-party supply by our Canadian team. In Canada, new restrictions have had an impact on foodservice sales volumes as in-room dining has been eliminated across a number of provinces. Our commercial teams are joined at the hip with our foodservice and retail partners, resulting in a much better understanding of supply and demand requirements. Foodservice operators have adjusted their business models, simplifying their menus, catering to pickup and delivery. Consumers have adjusted as well, having gone through this last spring. Our teams continue to focus on growing our value-added products portfolio. We talked about the repositioning of our Armstrong brand last quarter, one of Canada's top everyday cheese brands through new packaging, new formats that cater to convenience, such as slices and grated formats that include snacking formats as people continue to cook and eat more at home. This continues to perform very well for us. We launched another flavor, our Armstrong Mexican Fiesta cheese block, which has already been nominated as best new product by Canadian consumers. E-commerce continues to be an important outlet for consumers, and the Canadian team has successfully rolled out Le Frigo in Québec and The Saputo Fridge in Ontario and is now planning to roll it out across Canada. Not only are we diving into B2C but putting in investments to ramp up our B2B and our B2C through B2B platforms, in other words, reaching consumers directly through retailers, online channels and through third-party online channels as well. Based on the key learnings from this rollout, we have now launched an online ordering platform for our U.K. business and specifically, our award-winning Cornish cheddar, Davidstow. In addition to traditional e-commerce activities, the team has ramped up its online efforts to connect directly with consumers through social media, cooking recipes, tips for us foodservice operators on how to improve their efficiencies in the current environment, are part of a basket of tools and services that complement our overall e-commerce strategy. Combined with the company's strong customer service and supply chain execution, it is our ability to produce consistent, high-quality products at competitive costs that continue to drive our strong performance. In terms of our large-scale capital projects, we completed our Saint-Léonard and Saskatoon projects, which will give us increased capacities on a variety of higher value-added products. Our Port-Coquitlam state-of-the-art large-scale fluid and future plant-based facility is also on track to be completed by the end of next summer. These are tremendous accomplishments in light of COVID restrictions. Moving down under, milk supply in Australia continues to improve over the previous couple of years, and we are ahead of plan from a total milk intake perspective. Favorable weather conditions have helped increase milk production for our current base of suppliers. We've seen increased milk purchases from third-party milk brokers, and we continue to increase our total manufacturing opportunities. Volumes are performing better than prior year, albeit mix between channels and within channels has seen more volumes of lower-margin products sold, particularly on the export side. We recently announced the rebranding of our COON brand, the category-leading everyday cheese to CHEER. This exercise was completed after an exhaustive research period and work with Australian consumers. The newly branded product will hit shelves in July, and the teams are very excited about the promotional and marketing opportunities that the relaunch provides. Liddells continues to do very well in the lactose-free cheese side. Our specialty cheese brands from our last acquisition of Lion's specialty cheese division continue to outperform our original projections. With Australia coming out of lockdown, foodservice volumes continue to improve and perform well. COVID-19 has seen a significant impact on export prices and demand for Australian-sourced products, particularly on the butter side and in our ingredients business. We are, however, seeing renewed optimism in key markets like Japan, which again, hopefully, point to more normalized trade conditions from a supply/demand perspective. The latest GDT pricing point to a more optimistic fourth quarter. The great thing about having a diversified business like Saputo is that although we see weaker exports from Australia, we saw a strong performance in Argentina, even though they continue to be under full lockdown. Although overall domestic market consumption is down, we have seen a mass exodus of smaller competitors that have had to exit the industry due to the COVID situation. As a result, our teams have been very aggressive in terms of picking up more milk. And we've seen nice growth year-over-year, which has benefited our operational efficiencies.Foodservice channels are down versus last year. However, on the retail side, the business performs -- continues to perform very well with La Paulina, which is the #1 cheese brand in soft cheese, mozzarella, semi-hard and hard cheese as well. The team launched new flavors as part of its cream cheese range as it continues to introduce new formats, innovation, line extensions and excitement to the category. This year is a big year for La Paulina as it celebrates its 100-year anniversary. Exports continue to perform very well in light of the fact that Argentina has some of the lowest-cost milk in the world, which ultimately benefits our competitiveness in export markets. Moving over to U.K. Cathedral City continues to perform very well. The brand continues to capture value share as it continues to strengthen its category-leading position. As I mentioned last quarter, we are leveraging the power of this brand by bringing it to our other platforms. Cathedral City is now available in over 6,000 stores in North America, and volumes continue to outpace our original projections. Clover is our top spreads brand and continues to perform well as well. Frylight, another great brand that we inherited, the biggest spray oil brand in the U.K., has also experienced healthy growth against last year. We are finalizing the transfer of production from outside of London to our Kirkby site where we produce our butters and spreads. Our Vitalite spreads brand has also had a packaging refresh highlighting our plant-based messaging. The one area of our business that continues to pose a challenge for us in the U.K. is on the ingredients side. There are traditionally high fixed-cost operations and the U.K. products that are primarily used as ingredients for infant formula suppliers. The infant formula space has taken a hit internationally, and ingredient sales have suffered as a result. Our teams, however, are in the process of diversifying our customer mix. Another challenge last quarter was accelerating the audit process of our facilities in a COVID environment. The great news is that our teams have worked diligently to improve the consistency and quality of our ingredient products, which positions us very well moving forward. The Brexit deal was signed at the end of the year. Essentially, what we have is a tariff-free and quota-free trade agreement with the EU. This results in little impact to our business in the U.K. We will, however, be in a position to restart some key export opportunities in large cheddar consuming nations in the EU, as a result, which will help accelerate our export initiatives. Lino, that's a quick overview of our divisional activities.
Well, I appreciate that, Kai, and I really like the color and the insight. Thank you very much for that. So before we open the floor to questions, let me end with a quick update on our environmental progress. Since the announcement of our 2025 targets, we've undertaken 12 specific projects globally to accelerate our climate, water and waste performance. These projects are part of our 3-year investment commitment of $50 million and are on track to be completed by the end of the fiscal year and should deliver notable positive impacts. And our recent updated score of B by CDP for our climate disclosure is a testament the market is noticing and rewarding our ESG initiatives. This score places Saputo well above the average score of D in the food and beverage processing group and is a direct reflection of the important steps we've taken in our environmental journey so far. Doing the right thing is embedded in our culture. We are deeply committed to doing more on this front as we strive to deliver on all 7 pillars of the Saputo promise. As we navigate through the next few months, we'll stay focused on leveraging our global network and the strength of our top brands, staying on course with current and future strategic investments aimed at fueling growth and living up to our long-standing commitment to manufacture high-quality products. Our financial foundations remain strong. We're in a solid position to seize acquisition opportunities. And as we work through the current landscape, we will keep profitability enhancement and shareholder value creation top of mind. Allow me to conclude by acknowledging, once more, the incredible contributions of our talented and passionate team. And on that note, we'll now proceed to answer your questions. Tommy?
[Operator Instructions] And we'll get to our first question on the line with Irene Nattel from RBC Capital Markets.
I have to say like my head was spinning a little bit as Kai was walking through everything you're up to. Very impressive. But if we could start, please, focusing on the U.S. and 2 great new hires and additions to the team. And can you just spend a couple of minutes talking about where you want to take this U.S. business, how you want to get there, what the key elements will be? And what it was about these 2 individuals, in particular, that caused you to say, no, these are the 2 to get us there or help get us there.
Yes. Well, thank you very much, Irene, for your comments. There is a lot on the go. And to be honest with you, we don't use COVID as an excuse to stop progressing. In fact, you've probably heard me say that COVID is a license to change. COVID gives us an opportunity to think about things that we would never have ever thought of before. And I'm so proud of the way the team is responding in every single one of our divisions. I mean, the general sentiment is that there's optimism, that there's progress, that we're excited about the present, and we're excited about the future. Our foundations are solid, and I think there's some really amazing plans for the future, including your specific question, the one USA. and the initiatives that are there and the addition to strengthen our talent, we've got quite a bit of bench strength within the organization. And on that, I'm going to hand it off to Kai to talk about some specifics about what we expect to get in the U.S. despite the challenging environments, the volatile markets, the heavy competition, we're really, really bullish on our U.S. platform. Kai?
Thank you, Lino. Well, I'll start off with something that we've done throughout our history, and that's optimizing our network. And that's going to be a tremendous lever for us. As we brought the 2 legacy divisions together, there's going to be synergies that will result as the 2 groups come together. And with some of the major initiatives that have been in the pipeline for quite some time now, we're finally going to see some of the fruits of a lot of that work. When you talk about our ERP platform in terms of improving efficiencies, that's an area where we feel we'll have a tremendous benefit to the merged one USA. When we look at our existing portfolio, we have a lot of great brands, but we perhaps have too many brands, and it's all about -- in this COVID environment, it's been a blessing in disguise that -- in that it's forced us to re-evaluate our business because we feel that, post-COVID, that consumers' preferences and purchasing patterns have changed forever. And so we have to adjust our business as a result. And we have a tremendous portfolio of brands that we're going to be looking at to ramp up because we've got a great position, whether it's in the goat space with the market leading Montchevre brand. We've got some tremendous brands in the blue cheese space. So that's going to -- we want to have someone from the outside, bring some experience from their previous life. So our hire on the marketing side has tremendous CPG experience, also has some cheese experience. So we're going to leverage that and bring that to the U.S. group. We also -- within the U.S., let's not forget that SDF has been tremendous in terms of going to market, working with customers and consumers and providing solutions. So it's about unleashing the power of that legacy business and bringing it over to the SCUSA legacy business. And that's probably the biggest opportunity that we see, is really on the cheese side moving forward. Other main drivers, I talked about increasing the value of our whey. I mean we're naturally vertically integrated by producing cheese. We have whey ingredients as a byproduct we have through our history, traditionally, just moved those volumes out. And as a result of the acquisitions we've made over the last couple of years, it's allowed us to be introduced to new technologies new products, new markets, new uses for the ingredients. So we've got a great opportunity to kind of revisit that business and figure out how we're going to move up the value chain and away from that -- the commoditized sort of battleground. Then we have the basic discipline that we have in a lot of our divisions, whether it's in Australia or the U.K. from an integrated business planning perspective. By bringing the 2 legacy divisions together, we feel that we can increase the efficiencies, which will result in driving profitable growth for us.So a lot of stuff on the go. And we feel that the 2 new hires that we've brought on board, the retail experience that Lyne brings, the leadership track record that she brings, we're very excited about these 2 new members. And they're going to be great contributors to our efforts in the one USA.
We'll get to our next question on the line from the line of Patricia Baker with Scotia Capital.
I want to follow-up on the U.S. division and these -- the 2 hires of Lyne Castonguay and the new marketing person. And obviously, these hires are definitely going to go a long way to furthering your strategy to drive retail growth. I'm just curious, Lino and Kai, whether this was something in the works pre-COVID or did the COVID experience sort of accelerate and make you realize that it was important to put these new positions into place? And then secondly, Kai, when you were talking, you mentioned somebody called Nancy something, I didn't catch the last name. And I'm curious, is that the marketing person?
Yes. So Nancy is the marketing person. Lyne is our senior leader in the U.S., who will be transitioning from Carl. So your question, Patricia, is that has this COVID environment initiated these changes? And partly, the answer is yes. We knew at some point, we would want to bring the 2 divisions together under one umbrella. The go-to-market strategies make a lot of sense when you have a national account or you have a banner that's buying product from you. We want to be and we are the dairy solution in many other platforms, except our go-to-market strategies almost were divided between SDF and Saputo Cheese USA.COVID actually highlighted how important it would be to bring those 2 divisions together sooner rather than later. And so when we saw the opportunity in logistics, in networking and talent, when we identified some of the values that we had in the brand, the data collection, the information that SDF has within their market intel, we thought that it was the right time to optimize these teams and bring them together. I will tell you that you are aware of this that we have been looking for -- we had been looking for a replacement to Paul Corney prior to Carl taking the lead there. And so the search for, I guess, a successor for Paul had started well before even COVID. It's just that we thought through COVID that it would make a lot of sense for us to unify those 2 divisions. Carl was spearheading that initiative, and so he thought to take the lead. And then when we were, I guess, introduced or offered the additional talent, it fit very, very well within our scope of where we want the U.S. platform to be. So Nancy has been really a blessing for us on the marketing side. Lyne, who will be starting very, very shortly, we believe, is going to be a blessing for us in terms of succession. So we had the idea to bring it together, but COVID sped up the entire process for us.
And I would just add...
Okay, can you just talk about -- go ahead, Kai.
Sorry. I was just going to just add that the timing is also perfect in that we're developing that strategic growth plan. They're going to be key contributors to that plan, and it's going to be a big part of what the U.S. is going to be focused on for the next 4 to 5 years.
Okay. If I may ask another question and maybe a question that you're not prepared to answer at this time. But Kai, I agree with you that the purchasing patterns have probably changed forever. And I'm just curious if you're willing to share with us precisely what you think has changed. Or is that something you'd rather talk about once you develop the strategic plan to address that?
Well, we feel like if you take e-commerce as an example, pre-COVID, it was a much smaller percentage of people's regular purchasing patterns. We know that moving forward, that has increased significantly. Depending on which part of the world you're looking at, it can range up to about 30% in terms of grocery requirements. And that's going to continue to change as the e-commerce model continues to be refined, and people are able to order groceries and as an example, United States, make an order and receive their groceries in less than a couple of hours at their doorstep. The convenience and then just the -- obviously, the stress of, say, finding parking and going into the grocery store, so that's -- we feel that's not going to change. And that's why we're looking at those initiatives that kind of line up with consumers' purchasing patterns. Brands, also very important. We've seen in this COVID environment that people seek comfort, and a lot of our brands are right in there, right in that wheelhouse, whether it's in the Canadian division, whether it's in Argentina, Australia. I highlighted a lot of our market-leading -- our category-leading brands. And we're going to leverage that as we move forward.
We'll get to our next question on the line from the line of Peter Sklar with BMO Capital Markets.
Kai, just following up on the comments you just made on the e-commerce channel. So as a higher proportion of product is sold online through the grocery channel, I mean, is it the same product and packaging? Or do you need to adjust your assortment? Because what's good for the bricks-and-mortar is not necessarily appropriate for online.
Yes, there's definitely some requirements when it comes to the packaging formats. There will have to be some modifications. But this is a space we're trying to figure out and will be part of that strategic growth plan. It's figuring out as we make future investments to ensure that we're investing in those assets that will give us the flexibility required to meet the changing demands of our consumers.And let's not forget, consumer preferences change very, very quickly. So we have to be very careful in our due diligence in terms of figuring out what sort of infrastructure do we want to have in place. And that will be driven by the market insights, the market intel that Nancy will be working with the team, that Lyne will be working with the team. All of our decision-making will be driven by where we believe the market will be going, not where it is today, because, again, the consumer has changed so quickly in a relatively short period of time.We have -- we are already looking at repurposing certain facilities, our most recently acquired facility, Las Cruces in New Mexico, where we saw a drop-off in foodservice. We had shortages in labor in different parts of the country. We were able to use our agility, nimbleness and bring some of that volume over to Las Cruces. And we've seen that that's worked quite well for us. So that's caused us to rethink our network, and we'll be looking to readjust, if necessary, again, in line with where we feel consumers are going.
But just to clarify, is Saputo considering developing like its own online platform? Or do you just want to make sure you have the right products and assortments so that you can sell through the platforms that all the grocers in the U.S. are very quickly developing and growing quite rapidly?
Yes. So Peter, we're not going to be an e-commerce business. We are going to facilitate e-commerce for some of our customers. So as Kai alluded in his opening statement, you got the B2B business, and you got the B2B2C business. Now you got the B2B, I guess, the e business, which is the e-commerce business. And all of the market intel that we're gathering is going to make us a better supplier to the retailers that have e-commerce, whether that would be in the way that we take the photography of our products all the way through logistics and warehousing and distribution. Somewhere along the line, perhaps e-commerce would be one channel that we would cater to. But I would tell you, it will not be the dominant channel for us. We prefer to go through the retailer to get to the e-commerce customers.
Yes, we have to remember we have to balance that relationship with our key strategic retail partners. We do have direct-to-consumer, but it's basically for end-of-shelf-life product, specific products that don't compete directly with our retailer partners. But we do want to gain knowledge and experience on that side to better understand those channels.
Okay. Understood. And then just one last question directed towards you, Lino, if I could. Like in terms of your M&A survey of the world, I would think, given what's happened over the last year that dairies who are primarily focused on foodservice are under a lot of pressure, and that would have opened up the opportunity for you. Does that -- is that the case? And would you -- like is that of interest to you, dairies who are primarily exposed to foodservice? Or are you looking more towards [ re ] channel or more balanced dairies?
So the markets themselves on the M&A front had been very, very active. And it's not exclusive to struggling companies. It's also those companies that are very well placed in retail and have thrived through the pandemic. We're seeing that they're also for sale. So I did mention in previous calls that our pipeline remains very full, and we're very active. Now some files we were involved in that, ultimately, for one reason or another, we chose not to acquire the business, either because of price or conditions. But the pipeline does remain quite full. Now if I can define a little bit of that pipeline, we're not going to shy away from industrial or foodservice because we know that at some point in time, consumers are going to want to get back to eating outside the home. They're just chomping at the bits to get back to a normal life. So that's going to come back. So if there is an opportunity for us, which is a good strategic fit, not just because it's distressed and that it's at a low price that it's a good acquisition. It's going to be the right fit for us strategically with our orientation. So we are looking at assets that are in the industrial/foodservice category. But we are also looking at retail platforms that can enhance all of the learnings that we've had over the course of this last year.So again, pipeline for M&A, very, very strong. I'm still very optimistic with our clean balance sheet that there's going to be an opportunity for us to continue to grow organically, as Kai talked about, through our initiatives, but also continue to grow through M&A. And we're not going to discriminate between retail foodservice and industrial. All of those channels are very important for us.
And we'll get to our next question on the line from the line of Mark Petrie with CIBC.
I wanted to follow up on a couple of the things you've touched on already. Specifically with regards to the U.S., you talked about sort of optimizing the realizations from your whey byproduct. Could you just give a little bit more commentary in terms of what the timing is to do that? Is there much capital required? And how big are those markets?
Yes. Again, as a result of our 2 most recent large-scale acquisitions, Murray Goulburn, and Dairy Crest, we learned a lot from some of the ingredients that both of those businesses produced and marketed. And a lot of those products are produced for the infant formula market and for other specialized applications. And we felt that the process in developing these products, we have the raw material. I mean, again, we have major cheese plants with the byproduct being whey. So we feel there's an opportunity to move up the value chain and leverage the experience, the technology and the access to markets that these 2 recently acquired businesses bring to the table. So in terms of -- when you look at the ingredients business, typically, there are significant dollars required to introduce new technologies to provide capabilities to produce products that are specialized for the infant formula and other age segments of the market. So that will be part of the strategic growth plan, not only for the U.S., but for the rest of the group. And again, I will be in a position to share more details of that exciting plan with you folks come April, May or come the new fiscal year.
Okay. Fair enough. And when you sort of talk about and think about adapting your business to customer shifts, I'm just sort of curious how your M&A -- your thinking on M&A kind of fits into that. Is that something that you could utilize to kind of accelerate that shift or change the positioning? Or is that sort of a separate piece of analysis?
It's the same analysis that we've been doing, I would say, for the last 10 or 15 years. The dairy industry is not that large. If you think about the different geographies that are dairy producing countries, they haven't changed, with or without COVID. So it's important for us to understand that when we want to make an acquisition of manufacturing infrastructure, we need to be where the milk is. So our targets really haven't changed that much over time. However, if we have an opportunity to better balance each one of the platforms relative to foodservice, retail and industrial business, then we would welcome those opportunities to do so. But it's not a complete 180-degree turn from where we were. Still the same targets, still the same geographies, still the same categories of products that would interest us today or the ones that interest us 10 years ago, 15 years ago. So we're delighted that the pipeline has opened up for one reason or another. The pipeline for files have opened up. And again, we've been involved, I would say, probably -- in the last year through COVID, easily in 6 or 7 different files where we actually performed a due diligence with the intent to bring these acquisitions to term. And somewhere along the line, it wasn't because COVID -- the COVID environment changed or our interest in those categories changed. It was -- the reason we didn't materialize it, 1 or 2 or 3 of those acquisitions was, again, either price, valuation or conditions. But the appetite is still there, and the focus of what interests us before is still the same focus that we have today.
Okay. And just one other question. In the past, you've sort of talked about some of the challenges in the competitive environment in the U.S. across a few different channels, I think, mozzarella, some of your whey products and also in dairy foods. I'm just wondering if you can give sort of some high-level commentary with regards to how that's evolved over the course of the last quarter or a few months and what your view on the next couple of quarters is, just on a high level?
Yes. At a high level, I would say that the competition in the mozzarella space has not dissipated. With new capacity having come online recently, there has been intensified competition. But having said that, again, I think a key point of differentiation for us relative to our competitors is our ability to service our customers. Our teams have really, really stepped up to the plate. And that's allowed us to actually pick up some wins in this very competitive environment. On the mozzarella side, as an example, we just landed a sizable account recently. So there are opportunities to win and to win big when you are running your operations effectively and servicing your customers well. If you look at the United States, I would say that with what we see on the horizon, like we had a lot of uncertainty around the elections. We have a depreciating U.S. dollar, which helps commodity prices. We are coming off a year where there was a big lift in milk production, the highest we've seen in the last 7 years. But what we're forecasting is probably half of that growth as we go through calendar 2021. So those elements and with the vaccine rollout and with all of the projections for favorable economic conditions coming out of this COVID-type recession. And if you look at the GDT, which is a good bellwether for where commodity prices are going, we've had 6 successive positive GDT results. And so we feel cautiously optimistic about the prospects moving forward. But having said that, there will be continued volatility.
We'll get to our next question on the line from the line of Michael Van Aelst with TD Securities.
I just want to start off with a clarification. As far as your ingredient business and diversifying in the U.S., I just want to understand what I'm missing. You talked about the U.K. and having the infant formula product, and you're diversifying away from it or you're diversifying your mix a bit because that demand is weak yet. In the U.S., you're talking about moving towards that. Are these different types of ingredients? Or are you just assuming a recovery in the ingredient in the infant formula market?
No, the infant formula market, based on our market intel, it's a saturated marketplace. And there is -- we -- again, we do have the Australian platform and the U.K. platform that plays in that space. But if you look at the key markets for those products, primarily China, there's hundreds and hundreds of brands. And the top 5 brands would control the majority of the market. So that's not necessarily a space we want to play in. However, supplying ingredients, key ingredients to those infant formula manufacturers will continue to be important. We are looking at different segments when we talk about ingredients. We talk about the elderly in terms of the growing-up milk powders. Those are the types of products that we're going to be evaluating. There's also products in the nutritionals -- in the sports nutrition space that we want to look at. And that's that whole exercise that the team is currently embarking on in the U.S., again, trying to figure out where is the market going, where our consumer is going, to develop the right products for the future.Another initiative that is underway, and Lino mentioned it a little bit earlier, we are the leaders in the retail goat cheese space. As a result, we're one of the largest producers of goat whey. What we're doing today with that goat whey is not necessarily extracting the maximum value of that whey. So as a group, we're evaluating, what is the size of the prize when it comes to moving up the value chain on the goat whey side in that infant formula space as an example, because that's a space where there's relatively few players. And with the abundance of raw material that we have, we feel that, that's potentially a space that we can play in and do very well in. So that would be an example of a category we'd want to get into, again, along with the other segments: sports nutrition, aging -- the aging population, those types of segments.
Okay. That's clear. And then moving on to the U.S., in the second quarter, you had some real big volatility in the cheese price, and it really reflected in the -- negatively in the EBITDA for that division. In the third quarter, you had a huge drop in the cheese price inter-quarter and it didn't rebound. And yet this time, your profitability was actually quite solid and year-over-year and stable. So what was different this time that prevented that EBITDA from being impacted so negatively?
Well, in the U.S., the story is quite simple. I mean, from a volume standpoint, we are losing ground as compared to last year, and it does affect our overall efficiencies of our facility.On the flip side, yes, market factor being favorable since the beginning of the year through the quite extensive fluctuation of the block and the due fluctuation of the cost of milk. It's been turned out that it is favorable to us from a quarter-to-quarter perspective. Q1, we were like $23 million favorable, still with a spread that was positive to us. In Q2, there was a significant positive on the -- on a spread perspective, and the inventory realization was negative. And then when we get into Q3, well, the spread remained favorable as compared to last year. So all of those elements bring us close to at par in the U.S. sector, not undermining that from our dairy food product, we had quite a bit of a strong performance as we were able to kind of almost recover all the volumes that we've been losing since the beginning of the year. So that's kind of the story from an EBITDA perspective in the U.S.
So inventory realization was not an issue in Q3 then?
No, it was negative, but certainly not enough to offset the positive of the spread.
Okay. All right. And then in the U.K., on the demineralized whey, what's the time frame for you to be able to diversify your customer base? I don't know if you're adding third-party sales force or doing it internally. But can you talk about what the time frame is if you still think you can recover -- start selling the rest of those volumes in your Q4?
Well, the issue, Michael, is that the infant formula space, as you're aware, has been hit hard as a result of COVID. So key markets, again, like China, there has been a softness in the IF space. In terms of diversifying our customer base, there are ongoing talks as we speak. And we are sort of in that seventh inning stretch in terms of materializing agreements to get these volumes going again. Don't forget that I mentioned that there were delays as a result of audits for our facilities because this is -- these are IF ingredients. And because of the COVID environment in the U.K., we were unable to bring auditors to audit the facilities, but that has since been completed. So that will trigger progress as we move forward. And when we acquired the business, there were exclusive arrangements with -- exclusive arrangements with a major international player. Since they have had major difficulties in terms of moving the committed volumes, they have shown an openness to allow us to work with other suppliers, other IF suppliers. So that was kind of -- that created a little bit of a delay, but now we feel that we're in good shape. I would say that Q4, we're probably not going to materialize and see increased velocity just yet because these things take time, but I would anticipate as we begin the next fiscal year that we will see a recovery in that space.
Okay. And I assume that instant formula customers that you're negotiating with now or dealing with now, they're not targeting the China -- Chinese market then?
Well, any major IF player, China is a big percentage of their revenue and profitability. So you can't ignore that market. And -- but that market is recovering. So with the recovery comes increased velocity on the sale of infant formula. So we do anticipate a recovery as we move forward.
We'll go to our next question on the line from Vishal Shreedhar from National Bank Financial.
Around the last year around this time, management indicated that they were prioritizing purpose over profitability. I think that's the term that was used. And obviously, that's a regular business operating mode for Saputo. But I'm wondering, as you look at your business now, are there any major drags to earnings that still exist due to COVID-19 that perhaps a year from now, in the not-too-distant future when this pandemic is behind us, may fade away? And if you can quantify?
So purpose over profit is part of the Saputo culture. It's important for us above anything else, Two most important priorities for us, health and safety of our employees and the food safety of our products. So there is no circumstance within the organization, whether it would be COVID or anything else related, that would deter us from focusing on that. Part of the purpose over profit as well was securing our employees, making sure that they felt comfortable coming to work, that they knew that they would get their full wages. And that there is a job for them when they show up at the plant. That is what our focus has been, and that is part of our character. Now of course, there's some costs related to that. But what we like to do within Saputo is try to find containments for some of those costs, looking at ways that we can defer or mitigate perhaps or offset some of those costs. And this is where the innovation kicks in. This is where thinking outside the box, finding ways to reinvent ourselves, finding a license to change, where we're able to deliver the results that we did in Q3. It could have been very easy for us to say, well, we're in a pandemic. There's incremental costs. The market will understand if our results aren't there. That's okay if you want to stay stagnant. But if you want to continue to develop and grow, then you've got to challenge yourself to find ways to make things happen. So it's not because we're generating a record profit in this quarter that we've given up the purpose of our profit. That is still part of our character. Maybe, Maxime, you might want to talk a little bit more about that?
Well, it's just -- your second question was around the quantification. I'll just point it out that from a U.S. perspective, I mean, we're -- our EBITDA is pretty much flat over last year. We're calling out market factor to be favorable for $34 million. So that gives you an indication of the level of inefficiencies that we're absorbing within our system. There's other inefficiencies, if I can call it, or volume shortfall from the foodservice segment that exist into the other sector of our business. But certainly, the U.S. is the most impacted.
Okay. That's helpful. And just so I understand you, so the volumes were flattish, which is a nice achievement given all that's going on in the backdrop. But the foodservice market was indicated to deteriorate heading past this quarter, past Q3. So wondering if you could give us any insight, should we think like retail, obviously, still strong, but you're beginning to lap the strength that you saw last year. And then foodservice, it seems to me that the volumes are tapering off a little bit from the quarter that you just printed. Is that a fair way to think about it? Or am I off base?
Well, it's a fair statement. All of our channel, whether it's industrial, retail or foodservice, the trend has improved during Q3. So despite the fact that, yes, foodservice is below last year, well, foodservice for Q3 is better than Q2 and better than Q1. So the trend is improving all across.
Okay. And has that trend maintained into Q4 for the businesses? Or is it a bit of a change as we saw the most recent surge in COVID cases?
Well, we don't see the trend reverting back to the kind of Q1 where COVID started, and there was some sort of COVID panic buy and sort of thing. There's sort of kind of back-to-normal type thing. There's more restaurants that have access to delivery, Uber Eats, you name it. So that's helped the whole community of our customer on the restaurant space.
Okay. I appreciate that. And maybe lastly, last quarter -- and you've already touched on this on the call, but last quarter, management indicated that it wanted to enhance efficiency by integrated production planning, overhead cost containment, repurposing raw materials, so on and so forth. Were some of those benefits -- were they observed in Q3 as well? Or is that more of a next year -- next fiscal year thing, when you unleash the plan fully to us?
No. There is -- there would not be any benefits relative to that within this quarter. That's certainly something that will be tied in with next year and the following, and that's part of the element that Kai mentioned to -- relative to our strat plan to -- that we're working on right now. I guess, if I can, I would just add that within Q3, for us, not that we're turning completely the corner over COVID, but certainly, we're working on emerging stronger than even when we started. The deleveraging story continue, building on our balance sheet, very solid, ready to tackle M&A activity or to support our business with any organic initiative that we can. So that's what we're doing.
We'll get to our next question on the line from the line of Chris Li with Desjardins Securities.
Just first, I want to say thank you for the great business update in the beginning. It was very helpful and answered a lot of my questions. Just a few quick ones left here. In the U.S., in certain parts of the market, where COVID restrictions have been relaxed a little bit, when you talk to your foodservice customers, do they see an immediate spike in demand? Or is it -- has it been more gradual? Just want to get a sense of the pace of the foodservice recovery once most of the restrictions are lifted.
What we're seeing is a gradual recovery. We're not seeing a massive spike. And let's remember that people remain cautious, even in an environment where restrictions are being gradually lifted. We believe it will take some time for people to get back to a level of comfort where they're just going to be going off for dinner 7 days a week or like the average American, 4 to 5 days a week. So we think that will take time.
Okay. That's helpful. And maybe a couple of questions on the cost side of things. Do you expect that the recent rise in shipping cost to have a material impact on your operations? And if so, how are you mitigating the impact?
Well, the shipping cost or delivery costs, the recent increases that we're seeing, we don't see it coming down. In fact, this is a result of additional shipment from all the e-commerce, Amazon-type delivery, taking a lot of resources in that delivery space. So we don't see the cost really going down. From activities to reduce these costs, this is all around the integrated business that we are working through, especially in the U.S. And when does the cost really increase, we always have the option to go-to-market and try to -- recovering those costs on pricing to our customers. And all of those elements will kind of mitigate the impact. And I don't know, Kai, if you want to comment on that.
No, it's great.
Okay. Cool.
Great. And then maybe somewhat related, maybe just also your thoughts on minimum wage increases in some of the states that you currently operate in. Do you expect industry to give you a pass on the cost? And again, what are you thinking about the things to do to mitigate the impact?
Yes. So minimal impact to us. Most of the labor we have in all our facilities within the U.S. are above the $15 minimum wage. So no impact to us in any one of our platforms. Our employees are well compensated and have really good benefit program, so no impact to us. When you talk about passing on costs to the consumers, it has more to do with the cost of raw material, more so than the operating costs. As an example, there's a milk cost increase this year in Canada. Very much like last year, we roll up what that cost is to us, and we pass it to market. And we're delighted to see that last year's price increases were introduced and they held. We have every reason to believe that this year's milk price increases will be passed on to the -- our customers and will stick. So really, that's the extent of the impact of cost increases for us. The raw material represents 85% of of our cost of goods, that's the biggest impact for us.
That's very helpful. Maybe the last one, just back to the U.K. have you seen or are you starting to see some positive impact on Dairy Crest's domestic sales volumes as Brexit has perhaps made it more expensive for some of the imports from other countries with the higher tariffs?
We actually saw the biggest lift was right out of the gates when COVID hit. We're seeing a normalizing in terms of volumes, more moderated growth versus historical levels. We haven't seen a big impact. And even though there's a Brexit deal with the EU, it's going to be -- there's going to be added complexity, whether it's non-tariff barriers, whether it's permits, paperwork and all that sort of thing. And in an environment that we're currently operating, as I mentioned in my narrative, Cathedral City continues to perform extremely well and has grown in value share more than the growth of all the other brands combined. So the brand stands on its own 2 feet, and the quality speaks for itself. And I think the performance is evidence of that.
We do have another follow-up question on the line of Irene Nattel with RBC.
It's been answered.
We get to our next question on the line, the final question today is from Michael Van Aelst with TD.
Can you just update us on your plans to expand your capacity in the U.K.? I think you'd originally talked about expanding it as much as 50% over 3 or 4 years. And I'm wondering if you could give us the update, but also let us know if that's changed for any reason?
Sure. I'll be happy to do that. So in terms of the U.K., we've been able to actually increase capacity with initiatives that didn't require a whole lot of capital. So whether it's reducing our CIP time, that's the time required to clean between production runs, so we're able to successfully complete that this fiscal year.And as we look forward, we're looking to increase capacity over the next 3 years, probably about 10,000 to 12,000 metric tons. And that will meet the growing demand that we anticipate, not just domestically, but also to materialize those export opportunities I referred to earlier, whether it's in North America or whether it's in the EU, where there are some sizable markets when it comes to cheddar consumption.
And Michael, just to give you a little bit of color on that, perhaps more specifically. If you recall, when we acquired the Dairy Crest business, we were processing 495 million to 500 million liters of milk. Today, we're closer to 600. So that's what Kai was talking about. With some simple tweaks to the operations, we were able to get up to 600 million liters of milk. And by the time this project is done, we should be closer to 730 million liters of milk. So that's the growth that we have for that platform. Now the next step of growth is going to come with a bit more CapEx and perhaps a little bit more time because we need some downtime in the facility to be able to change out some of the equipment. But our plans for growth in the U.K. are very much like what they were when we first acquired the business.
And we'd like to -- sorry, Michael, I just wanted to add that we also -- that's the organic growth we're looking at, but we'd love to look at some brands and some other specialty English-style cheeses that could fold under Cathedral City's. So from an M&A standpoint, that could potentially lead to some opportunities as well.
And I would say that would be over and above also the plant-based initiatives that we're looking at on the cheese alternative side, and that's not to be discounted because I think that as a first mover, we do have advantages there, as Kai well indicated. That is a very good focus. Right now, it's small markets, but has the ability to grow.Because we are in the early phases of this movement, and we have a phenomenal product that we're bringing to market, I think we are going to be able to take advantage of that, very different from the plant-based beverage category where we are laggards, not leaders. For us, on the beverage side, we'd be very happy to do co-packing, which we've been quite successful at getting some contracts. But on the cheese alternative side, we can lead this category. I'm very optimistic about that.
Okay. Great. So just to clarify on the capacity expansion to go from 600 million to 730 million liters, that's more back end weighted over the next 3 years, I guess, like is that an 18-month time frame to get the capital in place or the equipment in place?
Yes, I'd say 18 months is a pretty good time frame. Yes.
Thank you very much. Mr. Saputo, we have no further questions on the line.
Thank you very much, Tommy.
We thank you for taking part in this conference call. We hope you'll join us for the presentation of our fiscal 2021 fourth quarter and year-end results on June 3. Have a nice day.
Thank you very much. And that does conclude the conference call for today. We thank you for your participation, ask that you disconnect your lines. Have a good day, everyone.